December 17, 2003
Conference Call Notes and Observations
Bed Bath and Beyond, Inc.
9 Months ended November 30, 2003
please see Disclaimer at bottom of report
This report was last amended on February 6, 2004. This is now a work in process as new data is being accumulated. We hope to, but do not guarantee to update this report or site with this new data.
Founded in 1971, Bed Bath & Beyond Inc. is a nationwide chain of superstores selling predominantly better quality domestics merchandise and home furnishings. The Company’s over 500 stores principally range in size from 30,000 to 50,000 square feet, with some stores exceeding 80,000 square feet. Bed Bath & Beyond combines superior service and a huge selection of items at everyday low prices within a constantly evolving shopping environment that has proven to be both fun and exciting for customers. Bed Bath & Beyond’s stock is traded on the NASDAQ National Market under the symbol BBBY and is included in the Standard and Poor’s 500 Index and the NASDAQ 100 Index.
Notes From Conference Call
Warren Eisenberg – Co-Chairman
1. Strong operating results continue.
2. Expects to open 7 additional BBBY stores in 4th Quarter. This would bring F2003 store openings to 86 ( 55 were opened during the 3rd quarter). There are currently 569 BBBY stores, 24 Christmas Tree Shops (CTS) and 30 Harmon Stores.
3. New stores are performing better than planned. BBBY expects this to continue going forward. New stores are exceeding productivity and earnings targets.
4. Called home goods market at $85 billion. Claimed market share is small, yet Mr. Eisenberg did not quantify the share.
5. Total domestic Store target is raised to 1050 from 950 previously.
6. Looking for growth in Harmon Stores and Christmas Tree Shops (CTS). Looks to add square footage in existing stores as a result of new merchandising initiatives, including, fine china, specialty foods and health and beauty care.
7. Possible expansion outside of USA.
8. 10 weeks remain in fiscal year. Comfortable with guidance in F2003 and looking for continued success in F2004.
Steven H. Temares – President and Chief Executive Officer
1. Once again, emphasized corporate decentralization. Decentralization gives them a unique position in the market place. Not familiar with any retail organization that has employed such a successful decentralized model.
2. Comp store sales increased by 6.4% in quarter, and 5.6% year to date. Expects 4Q2003 comp sales to be in the 3 to 5% range. Comp sales grew by 4.1% in 4Q2002.
3. Gross Margin is being increased due to gross markup and product mix. CTS margin is slightly below that of BBBY stores.
4. Operating Margin increased by 100 basis points over 3rd quarter of F2002. BBBY expects to see leverage going forward.
5. SG&A expenses were leveraged by 70 basis points. These improvements were from efficiencies in new store openings, occupancy costs , partially offset by higher payroll and advertising expenses.
Ronald Curwin – Chief Financial Officer
1. Foresees a continuation of exceptional operational performance.
2. Earnings estimates for F2003 are being raised to $1.27 per share. This is attributable to better than expected earnings and addition of CTS.
3. Uninterrupted record of doubling earnings every 3 years since going public in 1992.
4. Expects to operate 576 stores and 19.4M square feet at end of F2003. This is a square footage increase of 2.1M additional since F2002.
5. Net sales expected to grow in low 20% range for F2003. Same store comp sales are expected to increase by 3 to 5% in 4Q2003.
6. Operating profit margin expected to show improvement over F2002.
7. Capital Expenditures, excluding CTS are now planned at $135M, mostly for technology enhancements and new BBBY store openings. Depreciation and Amortization expected to be $80M.
8. Income taxes are expected to be provided at 38.50% for balance of F2003.
Initial Guidance for F2004
9. F2004 operating plan will be finalized after holiday season. Right now they remain comfortable with eps for F2004 to be $1.51. 1Q2004 earnings are expected to be $0.24.
10. New store openings are expected to be 80 – 90 BBBY stores occupying an additional 2.2M square feet. One third of the stores are expected to be opened in first half of the year and the balance in the second half.
11. Expected revenues of new store sales are expected to be $160 to $185 per square foot in their first 12 months of operation. The range was previously $150 to $175 per square foot.
12. F2004 are expected to increase in by mid to high teens %. Comp sales are expected to increase 3 to 5%. 1Q2004 consolidated revenues are expected to increase in the low 20’s percentage range, where comp sales are expected to increase 3 to 5%.
13. Further improvement in net margins are expected.
14. F2004 interest income is expected to have higher amounts than F2003. This is due to expected higher interest rates and higher invest able balances.
15. Effective tax rate is expected to be reduced “modestly” in F2004 from 38.50% to reflect weighted average of effective rates of operating states and territories.
16. Merchandise inventory levels were on plan at $1,168M. This is about $57.50 per square foot, compared to $56.70 per square foot from a year ago. This was a planned increase of 1%.
17. Capital expenditures were approx $79.2M for the first nine months. Expects capital expenditures to be $135M for all of F2003.
18. Company wide store space was 20.3 million square feet, whereas 19.2M was in BBBY stores.
Question and Answers
There were no questions and answers.
Some “ back of the envelope” financial observations
1. Revenues were $1,174,740. Value Line (11/14/03) was projecting $1,135M. Consensus estimates were $1,159M.
2. Comparable Store sales grew by approximately 6.40%.
3. Total Store Space was 19,196,000 square feet. This is an increase from end of fiscal 2002 of 1,941,000 square feet. This represents an increase of 11.2%.
4. Net earnings were $100,506M or $0.33 per share. Value Line (11/14/03) was projecting $0.32 per share. Consensus estimates were $0.31 per share.
5. Current Ratio is 2.19. The prior Current Ratios were as follows :
August 30, 2003 2.24
March 1, 2003 2.30
March 1, 2002 2.40
March 1, 2001 2.50
March 1, 2000 2.30
March 1, 1999 2.30
March 1, 1998 2.20
March 1, 1997 1.10
6. Flow Ratio is 1.41. The Flow Ratio is desired to be less than 1.25. Here is the formula : Current Assets = $1,967,023, Cash and Equivalents = $704,390, Current Liabilities = $896,802 and Short Term Debt = $ 0.
Flow Ratio = (CA – Cash) / (CL – STD) = 1.41.
The prior Flow Ratios were as follows :
August 30, 2003 1.35
May 31, 2003 1.40
March 1, 2003 1.59
March 1, 2002 1.56
March 1, 2001 1.83
March 1, 2000 1.76
March 1, 1999 1.86
March 1, 1998 1.81
March 1, 1997 1.78
7. Book Value is $ 5.90 per share . The prior Book Values were as follows :
August 30, 2003 5.40
May 31, 2003 5.06
March 1, 2003 4.96
March 1, 2002 3.78
March 1, 2001 2.88
March 1, 2000 2.00
March 1, 1999 1.48
March 1, 1998 1.07
March 1, 1997 0.78
8. Gross Margin was 41.45% . The prior Gross Margin levels were as follows :
August 30, 2003 41.31
May 31, 2003 41.41
March 1, 2003 41.40
March 1, 2002 41.20
March 1, 2001 41.20
March 1, 2000 41.30
March 1, 1999 41.70
March 1, 1998 41.30
March 1, 1997 41.40
9. Operating Margin is 13.74% . The prior Operating Margin levels were as follows :
August 30, 2003 14.02
May 31, 2003 10.12
March 1, 2003 13.1
March 1, 2002 11.8
March 1, 2001 11.4
March 1, 2000 11.3
March 1, 1999 11.4
March 1, 1998 11.1
March 1, 1997 11.0
10. Net Profit Margin is 8.56% . The prior Net Profit Margin levels were as follows :
August 30, 2003 8.75
May 31, 2003 6.43
March 1, 2003 8.20
March 1, 2002 7.50
March 1, 2001 7.20
March 1, 2000 7.10
March 1, 1999 7.00
March 1, 1998 6.90
March 1, 1997 6.70
11. SG&A is 30.26% . The prior SG&A levels were as follows :
August 30, 2003 27.29
May 31, 2003 30.96
March 1, 2003 28.30
March 1, 2002 29.40
March 1, 2001 29.80
March 1, 2000 30.00
March 1, 1999 30.20
March 1, 1998 UNK
March 1, 1997 UNK
12. Weighted Average Shares Outstanding are 305,156T.
August 30, 2003 304,172
May 31, 2003 303,038
March 1, 2003 301,147
March 1, 2002 298,667
March 1, 2001 292,876
March 1, 2000 288,234
March 1, 1999 286,472
March 1, 1998 UNK
March 1, 1997 UNK
Dilution is something to watch.
13. Inventory Turnover Ratio is Cost Of Sales / Average Inventory. If we use last trailing 12 months Cost of Sales of $2,472.5 and average inventory of $992.3, inventory turnover would be 2.49.
The prior inventory turnover levels were as follows :
August 30, 2003 2.46
May 31, 2003 2.40
March 1, 2003 2.60
March 1, 2002 2.50
March 1, 2001 2.60
March 1, 2000 2.60
March 1, 1999 2.60
March 1, 1998 2.70
March 1, 1997 2.60
Analysis of the 10-Q and observations
1. According to information supplied by the company, Bed, Bath and Beyond, imports less than 10% of its purchases.
2. According to the company, S&P carries a BBB rating for Bed, Bath and Beyond. Prior to this year it was BBB-. Company claims this rating is not material. As the companies name and financial results are carrying it to preferential lease rentals. Prior to the well known name, the lower rating was used as a vendor negotiating tool.
3. Cash flow growth has been strong. Part of the strong cash flow is from compensating employees with stock options. When employees exercise the options, the employee pays the company for the options, hence increasing cash flow. The company also gets a tax deduction for compensating in stock options. The tax benefit from the exercise of stock options was $43,691,000 for the nine months ended November 29, 2003. As long as the stock price continues to rise, this has been of little concern to employees, and to shareholders for that matter. We are monitoring the dilutive effects, yet to be exact in a calculation of cash flow savings is nearly impossible. The company did not buy back any shares over the last 3 years. This of course caused dilution. Had the company bought back shares to fight the dilution, free cash flow would have been materially reduced. We are not commenting whether the company should or should not buy back shares. We are merely stating that free cash flow, would look substantially different, had the same amount of shares that were issued to employees, had been bought back by the company. We have always believed that management is talented and prudent, and we believe that the company strategically did not repurchase the shares.
If you are a client of ours, and if you have questions regarding Bed, Bath and Beyond, Inc., please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading this report, we urge you to do your own research. We will not be responsible for any person making an investment decision based on this report. This report is a “by-product” of our research. We are not responsible for the accuracy of this report. We are not responsible for errors that may occur in this report. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate our short sale position of Bed, Bath and Beyond, Inc. from our portfolios. This report may have undergone revisions starting on December 18, 2003. We will not notify readers of future revisions. We are not responsible to keep readers of this report updated for changes or material errors or for any reason whatsoever. This report is dated December 17, 2003; it is possible that by December 18, 2003 we could have covered our entire Bed, Bath and Beyond, Inc. short sale position without giving notice to any reader of this report. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have Bed, Bath and Beyond, Inc. in their portfolios. There could be various reasons for this. Again, if you would like to discuss Bed, Bath and Beyond, Inc., please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).
Information herein is believed to be reliable, but its accuracy and completeness cannot be guaranteed. Opinions, estimates, and projections constitute our judgment and are subject to change without notice. This publication is provided to you for information purposes only and is not intended as an offer or solicitation. Redfield, Blonsky & Co. LLC and Ronald R Redfield, CPA, PFS, may hold a position or act as an advisor on any investments mentioned in a report or discussion.